Estimate your manufacturing overhead allocation rate.
The total budgeted indirect costs for the upcoming period.
Direct Labor Hours
Machine Hours
Direct Labor Cost ($)
Units Produced
The estimated activity level for the allocation base selected above.
Predetermined Overhead Rate:
Applied Overhead Logic:
How to Calculate Predetermined Manufacturing Overhead Rate
In managerial accounting and cost accounting, the Predetermined Overhead Rate (POHR) is a crucial metric used to apply manufacturing overhead to products or job orders. Since actual overhead costs are not known until the end of the period, companies must estimate a rate at the beginning of the period to cost products as they are completed.
The Predetermined Overhead Rate Formula
The formula relies entirely on estimates made before the period begins. It is calculated as:
POHR = Estimated Total Manufacturing Overhead Costs / Estimated Total Amount of the Allocation Base
Where:
Estimated Overhead Costs: The total expected indirect costs (electricity, factory rent, indirect labor, depreciation) for the upcoming year.
Allocation Base: A measure of activity that drives costs, such as Direct Labor Hours, Machine Hours, or Direct Labor Dollars.
Step-by-Step Calculation Guide
Step 1: Estimate Total Overhead Costs
First, analyze historical data and future budgets to determine the total manufacturing overhead for the coming period. This includes fixed costs (like rent) and variable costs (like electricity based on production volume).
Step 2: Select an Allocation Base
Choose a base that correlates with your overhead usage. Common bases include:
Direct Labor Hours: Best for labor-intensive manual production.
Machine Hours: Best for highly automated manufacturing.
Direct Labor Cost: Used when overhead rates fluctuate with wage rates.
Step 3: Estimate the Total Quantity of the Base
Forecast the total amount of the allocation base (e.g., total machine hours) expected to be used during the period.
Step 4: Divide
Divide the total estimated costs (Step 1) by the total estimated base (Step 3) to get your rate.
Example Calculation
Let's assume "ABC Manufacturing" anticipates the following for the next year:
Estimated Overhead Costs: $500,000
Estimated Direct Labor Hours: 25,000 hours
Using the calculator above or the formula:
$500,000 / 25,000 hours = $20.00 per Direct Labor Hour
This means that for every hour a direct laborer works on a product, ABC Manufacturing will add $20.00 to the cost of that product to account for overhead.
Why is POHR Important?
Using a predetermined rate allows companies to:
Cost Products in Real-Time: You don't have to wait for the electric bill to arrive to know how much a product costs to make.
Consistency: It smooths out seasonal fluctuations in overhead costs (e.g., heating costs in winter) over the entire year.
Bidding and Pricing: Accurate cost estimates allow for better pricing strategies and contract bids.
// Updates the input label based on the dropdown selection to guide the user
function updateBaseLabel() {
var type = document.getElementById('allocation_base_type').value;
var label = document.getElementById('base_input_label');
if (type === 'dlh') {
label.innerText = "Estimated Total Direct Labor Hours";
} else if (type === 'mh') {
label.innerText = "Estimated Total Machine Hours";
} else if (type === 'dlc') {
label.innerText = "Estimated Total Direct Labor Cost ($)";
} else if (type === 'units') {
label.innerText = "Estimated Total Units Produced";
}
}
function calculatePOHR() {
// 1. Get DOM elements
var overheadInput = document.getElementById('est_overhead_cost');
var baseInput = document.getElementById('est_allocation_base');
var typeSelect = document.getElementById('allocation_base_type');
var resultBox = document.getElementById('pohr_result');
var rateDisplay = document.getElementById('final_rate_display');
var breakdownDisplay = document.getElementById('calc_breakdown');
// 2. Parse values
var overhead = parseFloat(overheadInput.value);
var base = parseFloat(baseInput.value);
var type = typeSelect.value;
// 3. Validation
if (isNaN(overhead) || overhead < 0) {
alert("Please enter a valid Estimated Overhead Cost.");
return;
}
if (isNaN(base) || base <= 0) {
alert("Please enter a valid Allocation Base amount (must be greater than 0).");
return;
}
// 4. Calculation
var rate = overhead / base;
// 5. Formatting Output based on Type
var formattedRate = "";
var unitText = "";
var breakdownText = "";
// Formatting currency for the breakdown
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
});
if (type === 'dlc') {
// If base is Cost ($), rate is usually expressed as a percentage
var ratePercent = (rate * 100).toFixed(2);
formattedRate = ratePercent + "% of Direct Labor Cost";
unitText = "Dollars of Direct Labor";
breakdownText = formatter.format(overhead) + " / " + formatter.format(base) + " = " + rate.toFixed(4) + " (or " + ratePercent + "%)";
} else {
// If base is Hours or Units, rate is Currency per Unit
formattedRate = formatter.format(rate);
if (type === 'dlh') {
formattedRate += " per Direct Labor Hour";
unitText = "Direct Labor Hours";
} else if (type === 'mh') {
formattedRate += " per Machine Hour";
unitText = "Machine Hours";
} else {
formattedRate += " per Unit";
unitText = "Units";
}
breakdownText = formatter.format(overhead) + " / " + base.toLocaleString() + " " + unitText + " = " + formatter.format(rate) + "/" + unitText.substring(0, unitText.length-1);
}
// 6. Display Result
rateDisplay.innerText = formattedRate;
breakdownDisplay.innerText = breakdownText;
resultBox.style.display = "block";
// Scroll to result
resultBox.scrollIntoView({behavior: "smooth"});
}